CURRENT ISSUES IMPACTING INDENTURE TRUSTEES 3:30 p.m. - 4:30 p.m. Friday, September 18, 2015

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1 CURRENT ISSUES IMPACTING INDENTURE TRUSTEES 3:30 p.m. - 4:30 p.m. Friday, September 18, 2015 Prepared for the American Bar Association Business Law Section Annual Meeting Chicago, IL, DC September 17-19, 2015 Sponsored by Committees on: Trust Indentures and Indenture Trustees (Cristeena Gilbert Naser, Chair) This panel will discuss recent developments of interest to corporate/indenture trustees. Panelists will present their views on the recent Marblegate and Caesar s Palace decisions interpreting Section 316(b) of the Trust Indenture Act as well as other topics of interest. Presenters: Mark F. Hebbeln (Moderator) Foley & Lardner LLP 321 North Clark Street, Suite 2800 Chicago, IL Tel: (312) Fax: (312) mhebbeln@foley.com Hollace T. Cohen (Panelist) Troutman Sanders LLP 875 Third Avenue New York, NY Tel: (212) Fax: (212) hollace.cohen@troutmansanders.com Cristeena G. Naser (Cris)(Program Chair) American Bankers Association Inc 1120 Connecticut Ave NW # 600 Washington, DC Tel: (202) Fax: (202) cnaser@aba.com Robert Evans, III (Panelist) Shearman & Sterling 599 Lexington Avenue New York, NY Tel: (212) Fax: (646) revans@shearman.com James Gadsden (Panelist) Carter Ledyard & Milburn LLP 2 Wall Street New York, NY Tel: (212) Fax: ( Gadsden@clm.com

2 CAPITAL MARKETS CLIENT PUBLICATION July 17, 2015 Keeping Marblegate in Perspective: Implications for Debt Restructurings, Indenture Amendments and New Bond Issues If you wish to receive more information on the topics covered in this publication, you may contact your regular Shearman & Sterling contact person or any of the following: Robert Evans III New York Harald Halbhuber New York Jason Lehner Toronto Joel Moss New York Fredric Sosnick New York Antonia Stolper New York SHEARMAN.COM Involuntary debt restructurings that have the effect of impairing a bondholder s right to receive payment may violate the Trust Indenture Act. This was recently held in the Marblegate/Education Management Corp. bondholder litigation. A first read of the case suggests potentially problematic implications. A deeper analysis shows a less troubling decision. The case is also relevant for the 144A for life market that is technically not subject to the statute. Involuntary debt restructurings may violate the Trust Indenture Act if they have the effect of impairing a bondholder s right to receive payment, even though they leave that right formally intact. That was recently held by the court in the Marblegate/Education Management Corp. bondholder litigation. The SDNY s recent opinion on the merits (Marblegate II) 1 confirmed its earlier holding on a request for a preliminary injunction to block the restructuring (Marblegate I) 2. A first read of the Marblegate decisions (and another recent SDNY decision involving Caesars Entertainment Corp.) 3 may suggest broad-reaching and potentially problematic implications for debt restructurings and indenture amendments. A deeper analysis shows a less troubling case. While the case is unlikely to drive issuers from the SEC-registered market, it may be a factor in the decision of whether to access the 144A for life market. Many US 144A for life indentures contain a provision that tracks the statutory provision at issue in Marblegate, so issuers may consider removing this provision in new bonds. This may spark a discussion about modifying the amendment provisions in US 144A for life bond indentures to allow for greater flexibility than would be permitted by the Trust Indenture Act.

3 Introduction In Marblegate, the defendant (EDMC) was a for-profit operator of colleges and professional schools. A bankruptcy filing was neither a viable alternative nor a credible threat for EDMC because upon a filing it would have lost access to the federal student aid programs on which it depended for the vast majority of its net revenues. To avoid that result, while still achieving a significant debt restructuring, the subsidiary of EDMC that issued the bonds launched an exchange offer and consent solicitation, pursuant to which bondholders would receive different treatment depending on the acceptance rate of the exchange/consent. If there were 100% participation by bondholders, the bonds would be exchanged into equity that then would be convertible into common stock of the parent guarantor of the bond issuer. If that level of participation could not be achieved, the company would implement an alternative restructuring in which all of its assets would be transferred to another subsidiary of the parent guarantor via a foreclosure sale by the company s secured lenders, the parent guarantee would be released, and non-consenting bondholders would be left only with recourse against a bond issuer that would have become an empty shell. Consenting bondholders would receive equity in a distribution from the other subsidiary. Marblegate was a holder of unsecured bonds that challenged this restructuring on the basis that it violated Section 316(b) of the Trust Indenture Act, which provides in pertinent part that the right of any bondholder to receive payment of the principal of and interest on such indenture security, on or after the respective due dates or to institute suit for the enforcement of any such payment shall not be impaired or affected without the consent of that holder. The issuer argued that the provision was not implicated because Marblegate s legal right to receive payment would not be affected, even though the restructuring would render that right effectively worthless. Marblegate asserted that the statute would be violated, even if as a matter of form its payment right was not affected, because as a matter of substance, the restructuring resulted in the elimination of its ability to receive payment. After concluding in Marblegate I that the likelihood of success on the merits weighed in favor of Marblegate (though the court denied the request for injunctive relief on other grounds), in Marblegate II, after a detailed analysis of the legislative history of Section 316(b), the court found in favor of Marblegate. Keeping Marblegate in Perspective and Limiting It to Its Facts In reaching its opinion in Marblegate I, the court indicated that: Practical and formal modifications of indentures that do not explicitly alter a core term impair [] or affect [] a bondholder s right to receive payment in violation of the Trust Indenture Act only when such modifications effect an involuntary debt restructuring. Involuntary debt restructurings. In further defining the scope of an involuntary debt restructuring, the court in Marblegate I distinguished indenture amendments that eliminated important protective covenants from a reorganization that seeks to involuntarily disinherit the dissenting minority, finding only the latter to violate the fundamental purpose of the Trust Indenture Act. It also characterized the reorganization as effecting a complete impairment of dissenters right to receive payment and a wholesale abandonment of that right. The opinion concluded that Section 316(b) did not allow companies to effectively eliminate the rights of non-consenting bondholders. The court expanded on this line of reasoning in Marblegate II. Citing from the offering circular for the exchange offer, the court noted that the company itself had described the restructuring as one in which non-consenting holders would not receive payment on account of their Notes. The court highlighted that although the reorganization would not formally alter the dissenting Noteholders right to payment [...] it was unequivocally designed to ensure that they would receive no 2

4 payment if they dissented from the debt restructuring. (emphasis added) As the opinion put it in a different place, the restructuring gave dissenting holders only the choice to take the stock offered in the exchange or take nothing. The court found that the complaining bondholder had bought a $14 million bond that the majority now attempts to turn into $5 million of stock, with consent procured only by threat of total deprivation. Stripping covenants from indentures. Typical covenant strips or other indenture amendments, through exit consents or otherwise, that occur in the absence of a broader restructuring that removes significant assets from the recourse of bondholders, should not be affected by the Marblegate decisions. In Marblegate I, the standard it adopted did not prevent majority amendments of a significant range of indenture terms, including many that can be used to pressure bondholders into accepting exchange offers. The court also approvingly quoted from a law review article stating that, although the Trust Indenture Act prohibited alterations of core provisions, bondholders can agree to eliminate other important protective covenants for example, covenants prohibiting the firm from paying dividends, covenants requiring the firm to maintain a specified net worth, or covenants prohibiting the firm from incurring debt senior in any respect in right of payment to the debt for which the exchange offer is made. A case of substance over form. Overall, Marblegate perhaps is best viewed as a case in which the court privileged substance over form. In the eyes of the court, as a substantive matter, dissenting bondholders were being deprived of the entirety of their recovery even if their legal rights remained intact. The court specifically highlighted that the company had apparently assured its regulators that the structure of the transaction was purely a formality. The court also sided with the plaintiffs in their contention that the right protected by the statute was substantive rather than formalist, and the opinions contain several other examples of this form over substance rhetoric. Finally, the court was not persuaded by the company s argument that the asset strip was immune from attack because it was accomplished through foreclosure by the secured lenders, rather than through a direct action by the company. Earlier cases. In Marblegate, the defendant unsuccessfully relied on two earlier decisions by courts in other judicial districts that, on different facts that did not involve a present intention of asset transfers, had held that Section 316(b) protected only a holder s legal right to receive payment, but not its ability to ultimately recover on its claim. 4 The court relied instead on Federated Strategic Income Fund v. Mechala Group Jamaica Ltd., a 1999 SDNY case that had found that a restructuring plan under which the company would have transferred all of its assets to another entity, leaving bondholders with an empty shell, violated the Trust Indenture Act. Implications for the US 144A for Life Market? US 144A for life indentures typically contain Section 316(b)-style provisions. Marblegate has implications not just for SEC-registered bonds that are subject to the Trust Indenture Act, but potentially also for bonds that are issued only to qualified institutional buyers under Rule 144A without registration rights in so-called 144A for life transactions. That is because, although not legally required, even in 144A for life issues the indenture typically contains a provision similar to the one mandated by Section 316(b). Courts are likely to interpret those indenture provisions in a similar way, even if the corresponding statutory provision on which those indenture provisions were modeled does not apply. How to make 144A for life indentures Marblegate-proof. Issuers seeking to avoid Marblegate-style bondholder actions in a future restructuring would therefore have to remove those Section 316(b)-style provisions from their 144A indentures when issuing new bonds, or at least modify them so that they only protect a bondholder s right to sue for payment, but not its right to receive payment. (This distinction played a role in the analysis in Marblegate.) However, given the prevalence of these provisions in US bond indentures, it is possible that attempts to issue new bonds without them may meet with resistance from investors. Of course, even under indentures that do not contain Section 3

5 316(b)-style provisions, depending on the facts, bondholders may be able to advance other legal theories to attack a restructuring. Lowering consent thresholds for change of payment terms from 100% to 90%? The next step would be to not only remove the Section 316(b)-style language from 144A for life indentures, but to also change the amendment provision in those indentures so that it permits direct amendments to payment terms, without a need to resort to assetstripping. Having said this, the bond market may not be comfortable with moving from a rule of 100% to a rule of 51% for such changes to money terms. In a restructuring, not all bondholders may have the same incentives, and the market may well take the view that a greater percentage of principal amount that needs to consent to a restructuring will make it more likely that that a deal is genuinely fair to all holders. While there is no magic number in this regard, 90% is a percentage that we have seen in a recent US high yield transaction by a financial sponsor. In the European high yield market, where local laws have traditionally not been as flexible as the US Bankruptcy Code in permitting a change of payment terms through a cramdown, 90% has long been common. (In Marblegate, more than 90% of the principal had agreed to the exchange.) Would large long-term bondholders welcome a change? Minimizing the opportunity for free riders and holdouts could be in the interest of large long-term bondholders. Those holders may have spent considerable time and resources working with the company to come up with a plan for a restructuring that reduces debt to a sustainable level and avoids a value-destroying bankruptcy. In addition, large holders often do not have the luxury of sitting on the sidelines because the restructuring will not be feasible unless they participate. Large bondholders that have agreed to see their claims reduced will generally not look favorably on investors that have purchased a relatively small amount of bonds at a steep discount and now seek to extract value by holding up the consummation of the restructuring. It is also possible, however, that the bond market will be wary, at least for now, of giving US issuers too much flexibility in that regard. 1 Marblegate Asset Management v. Education Management Corp. (SDNY 2015). 2 Marblegate Asset Management v. Education Management Corp. (SDNY 2014). 3 Meehancombs Global Credit Opportunities Funds, LP v. Caesars Entertainment Corp. (SDNY 2015). 4 In re Northwestern Corp., 313 B.R. 595 and YRC Worldwide Inc. v. Deutsche Bank Trust Co. Americas (D. Kan. 2010). ABU DHABI BEIJING BRUSSELS FRANKFURT HONG KONG LONDON MENLO PARK MILAN NEW YORK PARIS ROME SAN FRANCISCO SÃO PAULO SAUDI ARABIA* SHANGHAI SINGAPORE TOKYO TORONTO WASHINGTON, DC This memorandum is intended only as a general discussion of these issues. It should not be regarded as legal advice. We would be pleased to provide additional details or advice about specific situations if desired. 599 LEXINGTON AVENUE NEW YORK NY Copyright 2015 Shearman & Sterling LLP. Shearman & Sterling LLP is a limited liability partnership organized under the laws of the State of Delaware, with an affiliated limited liability partnership organized for the practice of law in the United Kingdom and Italy and an affiliated partnership organized for the practice of law in Hong Kong. *ABDULAZIZ ALASSAF & PARTNERS IN ASSOCIATION WITH SHEARMAN & STERLING LLP 4

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7 The recent Marblegate opinion, issued by Judge Katherine Polk Failla of the United States District Court for the Southern District of New York, offers a broad interpretation of section 316(b) of the Trust Indenture Act (the TIA ), and holds that that section protects more than a noteholder s bare right to sue on their notes, but rather a more substantive right to actually obtain recovery. See Marblegate Asset Management, LLC v. Education Management Corp., 2015 WL (S.D.N.Y., Jun. 23, 2015). The Marblegate case stemmed from the out-of-court restructuring of over $1.5 billion of debt owed by Education Management Corp. (the Parent Company ) and its affiliates, consisting of over $1.3 billion of secured bank debt and over $200 million in unsecured notes (the Notes ) that were qualified under the Trust Indenture Act. The Notes were issued by Education Management LLC, (the Issuer ), a subsidiary of the Parent Company, but they were guaranteed by the Parent Company. Pursuant to the terms of the indenture, the Parent Company s guarantee could be released either by a majority vote of the Noteholders or by a corresponding release of the Parent Company s guaranty of the secured debt. An ad hoc committee of creditors negotiated the terms of a restructuring transaction that would exchange the Notes for equity equivalent to approximately a 33% recovery. Secured creditors would receive both debt and equity for a total recovery of approximately 55%. In order to encourage 100% voluntary participation by creditors, the restructuring transaction included a provision known as the Intercompany Sale that went into effect if any creditor did not consent. The Intercompany Sale involved (i) the release by the secured lenders of the Parent Company s guarantee of their loan, which would trigger the release of the Parent Company s guarantee of the Notes; (ii) the exercise by the secured creditors of their right to foreclose on substantially all the assets of the issuer; and (iii) the immediate sale by the secured creditors of the foreclosed collateral back to a new subsidiary of the Issuer. The new subsidiary would then distribute debt and equity to the consenting creditors pursuant to the terms of the restructuring agreement. The Intercompany Sale was designed to ensure that any creditor that did not consent to the restructuring would be left with only a worthless legal claim against the empty shell of the Issuer, and no guarantee rights against the Parent Company. Although the restructuring agreement was supported a large majority of the creditors, Marblegate, a holder of $14 million of Notes, dissented from the restructuring and sought a temporary restraining order and preliminary injunction to stop it. Marblegate argued that the Intercompany Sale violated Marblegate s rights under section 316(b) of the Trust Indenture Act to receive payment of the principal and interest owed on the Notes. Marblegate s request for an injunction was denied, and the Intercompany Sale was carried out, subject to certain alterations to preserve Marblegate s rights in the event the court should ultimately rule that the transaction violated the TIA. On June 23, 2015, the District Court issued its Opinion and Order. The question considered by the court was whether a debt restructuring violates Section 316(b) of the Trust Indenture Act when it does not modify any indenture term explicitly governing the right to receive interest or principal on a certain date, yet leaves bondholders no choice but to accept a modification of the

8 terms of their bonds? Id. at *3. The court examined the text and the legislative history of the Trust Indenture Act in depth, including early drafts of the TIA, contemporary reports from the SEC, the Senate and the House, and other historical records. Based on these sources, the court rejected the argument that section 316(b) does nothing more than preserve a noteholder s right to sue to obtain a judgment for the interest and principal provided in the indenture. The court reasoned that such an interpretation was inconsistent with the intended purpose of section 316(b), which was to protect a holder s substantive right to receive an actual monetary recovery. The purpose of the TIA was to prevent precisely the nonconsensual majoritarian debt restructuring that occurred here, even if the Act s authors did not anticipate precisely the mechanisms through which such a restructuring might occur. Id. at *11. The court held that the TIA should be interpreted broadly to prohibit nonconsensual restructurings that have the effect of depriving holders of their substantive right to receive payment. Id. at *12. [C]ourts should give effect to the purpose of the Act, and not allow minority bondholders to be forced to relinquish claims outside of the formal mechanisms of debt restructuring. Id. Accordingly, the court held that the Intercompany Sale violated section 316(b), and ordered that the Parent Company s guarantee of Marblegate s rights under the Notes must remain in place. Issues raised by the Opinion: 1. The Marblegate court recognize[d] the troubling implications of the Trust Indenture Act in rewarding holdouts [and] its arguable obsolescence given the expense and complexity of modern bankruptcy. Should the TIA be amended to provide issuers and their holders practical alternatives to bankruptcy that include non-consensual debt restructuring of the sort attempted by Education Management Corp.? 2. What concerns should indenture trustees have regarding possible liability for their role in restructurings that may run afoul of Marblegate s interpretation of the TIA? If an indenture trustee cooperates with a majority of holders to carry out a non-consensual restructuring that runs afoul of Marblegate, has the trustee breached its prudent person duty toward the dissenting holders? 3. Can issuers contract out of the restrictions imposed by Marblegate by issuing only nonqualified bonds and specifying in the indenture that holders rights will not be as broad as those provided by section 316(b)? Would the market accept such securities?

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10 The decision of Judge Shira A. Scheindlin of the United States District Court for the Southern District of New York, in Meehancombs Global Credit Opportunities Fund, L.P. et al. v. Caesars Entertainment Corp., et al., 1 raises new hurdles for out-of-court restructurings of notes qualified under the Trust Indenture Act of 1939 (the TIA ) where the obligor fails to obtain the consent of all holders of such debt. As in Marblegate Asset Mgmt., et al. v. Education Mgmt. Corp., et al., 2 which preceded the decision by a few weeks, the court gave an expansive reading of section 316(b) of the TIA, 3 indicating that the elimination of parent company guarantees and amendment of covenants designed to insure that the obligor would have assets from which to pay the debt in the future, constituted an impairment of the nonconsenting noteholders rights to receive payment of principal and interest on their notes in violation of TIA section 316(b) and in breach of the indenture covenants mandated by that section. 4 In the Caesars case, certain minority holders of two issues of notes ( CEOC Notes ) issued by Caesars Entertainment Operating Company, Inc. ( CEOC ) brought suit against CEOC and CEOC s parent, Caesars Entertainment Corporation ( CEC ) (a guarantor of the CEOC Notes) seeking, among other things, to enforce their rights under TIA section 316(b) and section 6.8 and 508 respectively, of two CEOC unsecured note indentures, mandated by TIA section 316(b). The complaint alleged that prior to the execution of supplemental indentures in August 2014 the CEOC Notes were guaranteed by CEC, the asset rich parent of CEOC. The complaint also asserted that the removal of the parent guarantees and the amendment of the indenture covenants restricting disposition of substantially all of CEOC s assets to measure future asset sales based on CEOC s assets as of the date of the amendment in August 2014, constituted a breach of section 6.8 and 508 of the respective indentures and a violation of section 316(b) of the TIA. The amendments, which effectively left CEC free to transfer CEOC s assets without any obligation to back CEOC s debt, were consented to by holders of a majority in principal amount of the CEOC Notes. The majority noteholders were contacted by CEOC and paid par plus accrued interest (a more than 100% premium over market) for the majority noteholders debt in connection with the noteholders promise to support the future restructuring of CEOC and their consent to the removal of the CEC guaranty and the modification of the covenant restricting disposition of CEOC s assets. The complaint alleged that the amendments facilitated CEC s plan to put CEOC into bankruptcy while protecting CEC s owners, Apollo Global Management, Inc. and TPG Capital Inc., who acquired Caesars in The court reviewed Section 316(b), various cases, an SEC Report and articles with respect to the purpose and intended effect of section 316(b) and concluded that Section 316(b) addressed prior practice whereby majority bondholders often controlled by insiders used collective or majority action clauses to change the terms of an indenture to the detriment of minority bondholders. As [a] result of section 316(b) a company cannot outside of bankruptcy alter its obligation to pay bonds without the consent of each bondholder. 6 The court considered CEC s argument that the complaint failed to allege impairment of the legal right to payment under the Notes because CEOC was not in default of its obligations to make payment at the time of the release of the guarantee. The court concluded that CEC s narrow reading was not mandated by the statutory text; it is possible for a right to receive payment to be impaired prior to the time payment is due. 7 The court viewed the legislative history and two earlier decisions which read section 316(b) expansively, Federated Strategic Income Fund v. Mechala Grp. Jam. Ltd., 8 and Marblegate Asset Mgmt v. Education Mgt v3 1

11 Corp., 9 as supportive of a more expansive reading that takes into account the practical effect of the obligor s actions in determining whether the right to payment was impaired. The Caesars court denied the defendants motion to dismiss the complaint and found that the [c]omplaint s plausible allegations that the August 2014 Transaction stripped the plaintiffs of the valuable CEC [g]uarantees leaving them with an empty right to assert a payment default from an insolvent issuer 10 were sufficient to state a claim under TIA section 316(b). The court held that the removal of the CEC guarantees was an impermissible out-of-court debt restructuring achieved through collective action which is exactly what TIA section 316(b) is designed to prevent. 11 The court also rejected defendants arguments that the no action provision of the indentures precluded the suit because no default in payment of the principal of, or interest on, the CEOC Notes had occurred. The court based its holding on the fact that TIA section 316(b) preempts inconsistent indenture provisions, including no-action provisions. The court also found no merit in defendants argument that the language in section 316(b) and the corresponding mandated indenture provisions required an actual nonpayment of the CEOC Notes for the Noteholders to bring suit for breach of sections 6.8 and 508 of the indentures and the covenant of good faith and fair dealing. In fact, section 6.8 and 508 of the indentures lacked language contained in section 316(b) referring to payment on or after [the] respective [due] dates [for payment of principal and interest]. The court concluded that this omission of that language lends support to the conclusion that the indenture provisions are not limited to past due payments. The court therefore determined that the removal of the CEC guarantee impaired the rights of the nonconsenting Noteholders to payment without their consent and was sufficient to defeat the motion to dismiss the complaint as to the claims under section 316(b) of the TIA and under state law for breach of section 6.8 and 508 of the respective indentures and the covenant of good faith and fair dealing against CEC. 12 [1] 2015 U.S. Dist. Lexis 5111 (S.D.N.Y. Jan. 15, 2015). [2] 2014 U.S. Dist. Lexis (S.D.N.Y Dec. 30, 2014). [3] 15 U.S.C. 77ppp(b). TIA Section 316(b) provides in pertinent part the right of any holder of any indenture security to receive payment of principal of and interest on such indenture security, on or after the respective due dates or to institute suit for the enforcement of such payment on or after such respective dates shall not be impaired or affected without the consent of such holder. [4] Although the court s expansive reading of section 316(b) in Education Management was by way of dicta, it serves as a basis for the court s holding in Caesars. [5] 2015 U.S. Dist. Lexis 5111 at *5. [6] Id. at * [7] Id. at *16. [8] 1999 U.S. District LEXIS (S.D.N.Y. Nov, 2, 1999). [9] 2014 U.S. Dist. LEXIS (S.D.N.Y. Dec. 30, 2014). [10] 2015 U.S. Dist. Lexis 5111 at *17. [11] Id. at *18. [12] The court made no ruling with respect to CEOC because at the time of the court s decision the automatic stay applied to litigation against CEOC as the result of the then pending involuntary chapter 11 case against CEOC v3 2

12 Issues raised in the Caesars and Marblegate Opinions 1. Does section 316(b) only protect the Noteholder s legal right to payment under its Notes when due or does it protect the practical right to payment even in the case that there is no default? 2. Is the release of a guarantee a violation of section 316(b) (A) only in connection with a restructuring or (B) is the amendment of an indenture qualified under the TIA to delete or release a guarantee a violation of section 316(b) whether or not the primary obligor is in distress? Would the answer be the same with respect to the release of substantial assets which could have the effect of impairing the ability of the primary obligor to make payments of principal and interest in the future? 3. If the release of a guarantee is in accordance with a provision in a qualified indenture under the TIA that permits the release to occur either (A) automatically upon the occurrence of certain events (e.g., release of the guaranty by a senior secured creditor) or (B) with the consent of a majority of the holders of the Notes, would the release of a guaranty under (A) or (B) constitute a violation of section 316(b) (i) only if it occurs in connection with a restructuring or (ii) at any time? 4. Can the terms of a qualified indenture alter contractually the application of section 316(b) of the TIA? 5. If the indenture trustee has received a request from the Company and direction from the majority Noteholders to sign a supplemental indenture amending the indenture to release a guaranty or remove restrictions on the sale of substantially all assets of the primary obligor will the Opinion of Counsel to be delivered to the indenture trustee need to opine to the amendment s compliance with the TIA generally and to section 316(b) specifically? Section 9.03 of the Revised Model Simplified Indenture provides: Every amendment to the Indenture or the Securities shall comply with the TIA as then in effect. The Trustee is entitled to, and the Company shall provide an Opinion of Counsel and Officers Certificate that the Trustee s execution of any amendment or supplemental indenture is permitted under this Article 9. Assuming an indenture has similar language what opinion does this language require? v3 3

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14 James Gadsden Carter Ledyard & Milburn LLP 2 Wall Street New York, NY gadsden@clm.com August 6, 2015 Current Developments Affecting Indenture Trustees Improperly terminated financing statement. The Employees Retirement System of the City of Montgomery v. JPMorgan Chase Bank, N.A., 15 Civ (U.S.D.C., S.D.N.Y.). Most recently a class action complaint has been filed naming as defendants JPMorgan Chase Bank, N.A. and Simpson Thacher & Bartlett LLP, seeking damages because of the claw back claims asserted against the lenders in a term loan facility extended to General Motors. JPMorgan was agent for two loan facilities the Synthetic Lease entered into in 2001 and the Term Loan entered into in 2006, each with distinct collateral perfected by among other things, UCC-1s filed with the Delaware Secretary of State. In 2008 General Motors sought to pay off the Synthetic Lease facility and retained Mayer Brown to prepare the necessary documents, including UCC termination statements. A paralegal at Mayer Brown conducted a UCC search in Delaware and identified three UCC-1s naming GM as debtor and JPMorgan as secured party. Two were filed in 2002 covering the Synthetic Lease collateral. The third, filed in 2006, covered the Term Loan collateral. Mayer Brown included all three financing statements on the closing checklist and sent three termination statements to Simpson Thacher as counsel for JPMorgan for review. A Simpson lawyer responded nice job asking only that references to JPMorgan as Administrative Agent for the Investors be deleted. Simpson Thacher also approved an escrow agreement that authorized counsel for General Motors to file the termination statements when the escrow conditions were met. On October 8, 2008, the termination statements were filed. GM filed its chapter 11 case on June 1, 2009 at which point the filing of the termination statement for the Term Loan facility came to the attention of Morgan Lewis, counsel for JPMorgan in the chapter 11 case. In early July 2009, all of the lenders in the Term Loan facility were paid their principal and interest pursuant to a DIP financing order than contained the conventional investigation and challenge rights of the creditors committee. On July 31, 2009, the creditors committee filed an adversary complaint naming as defendants JPMorgan as Term Loan Agent and all 400 term loan participants who received payments in May 2009 or July 2009 under the DIP order. Pursuant to stipulated orders the participants were not served with the summons and complaint. Resolution of merits of the claim took nearly six years and four court decisions. The initial decision by the bankruptcy court was favorable to the Term Loan lenders. Bankruptcy Judge Gerber held that the filing of the term loan termination statement had not terminated the UCC-1 perfecting the security interest of the Term Loan Lenders. Official Committee v

15 JPMorgan Chase Bank, N.A. (In re Motors Liquidation Co.), 486 B.R. 596, 602 (Bankr. S.D.N.Y. 2013). The case went or the Second Circuit on direct appeal which on June 7, 2014 certified a question of law to the Delaware Supreme Court asking whether Under UCC Article 9, as adopted into Delaware law by Del. Code Ann. tit. 6, art. 9, for a UCC-3 termination statement to effectively extinguish the perfected nature of a UCC-1 financing statement, is it enough that the secured lender review and knowingly approve for filing a UCC-3 purporting to extinguish the perfected security interest, or must the secured lender intend to terminate the particular security interest that is listed on the UCC-3? Official Comm. of Unsecured Creditors of Motors Liquidation Co. v. JPMorgan Chase Bank, NA. (In re Motors Liquidation Co.), 755 F.3d 78, 86 (2d Cir. 2014). In response, on October 17, 2014, the Delaware Supreme Court held that [F]or a termination statement to become effective under and thus to have the effect specified in of the Delaware UCC, it is enough that the secured party authorizes the filing to be made, which is all that requires. The Delaware UCC contains no requirement that a secured party that authorizes a filing subjectively intends or otherwise understands the effect of the plain terms of its own filing. Official Comm. of Unsecured Creditors of Motors Liquidation Co., 103 A.2d 1010, (Del. 2014) The rationale of the decision was expressed as Before a secured party authorizes the filing of a termination statement, it ought to review the statement carefully and understand which security interests it is releasing and why. A secured party is master of its own termination statement; it works no unfairness to expect the secured party to review a termination statement carefully and only file the statement once it is sure that the statement is correct. If parties could be relieved from the legal consequences of their mistaken filings, they would have little incentive to ensure the accuracy of the information contained in their UCC filings. 103 A.2d at On January 21, 2015, the Second Circuit held the security interest had been terminated by the filing of the Term Loan UCC-3 with the authorization of JPMorgan, observing JPMorgan and Simpson Thacher's repeated manifestations to Mayer Brown show that JPMorgan and its counsel knew that, upon the closing of the Synthetic Lease transaction, Mayer Brown was going to file the termination statement that identified the Main Term Loan UCC-1 for termination and that JPMorgan reviewed and assented to the filing of that statement. Nothing more is needed

16 Official Comm. of Unsecured Creditors of Motors Liquidation Co. v. JPMorgan Chase Bank, NA. (In re Motors Liquidation Co.), 777 F.3d 100, 105 (2d Cir. 2015). When the case was returned to the bankruptcy court, steps were finally taken to serve the participants, leading to the present action. The complainant assets claims of breach of contract, gross negligence and fraudulent concealment against JPMorgan for releasing collateral without the consent of the lenders and failing to inform the lenders of the developments. The damages include any impairment of the rights of the lenders to sue the law firms involved due to running of any applicable statute of limitations. Common law indemnification against JPMorgan Malpractice, professional negligence and negligent misrepresentation against Simpson Thacher. The plaintiff affirmatively alleges that JPMorgan s action constitute gross negligence that it is not protected by the exculpations in the Loan Agreement. Proper jurisdiction to resolve disputes adequate protection payments under an intercreditor agreement. Delaware Trust v. Wilmington Trust, 15 Civ (PE) (U.S.D.C., S.D.N.Y.) July 23, 2015 In the Texas Competitive Electric Holdings Company LLC ( TCEH ) chapter 11 cases filed in the District of Delaware, Delaware Trust is Indenture Trustee and Collateral Agent for $1.75 billion in First Lien Notes and Wilmington Trust is Administrative Agent and Collateral Agent for $22.6 billion in bank debt subject to a common Intercreditor Agreement. There was a dispute on the allocation between the first lien creditors of the cash collateral payment made to the agent (whether to include accruing interest in the allocation which would favor parties with higher coupons). The funds were escrowed pursuant to a July 31, 2014 Escrow agreement pending a resolution of the allocation by the bankruptcy court or another court of competent jurisdiction. In March 2015, after TCEH proposed its chapter 11 plan, Delaware Trust brought an action in the New York courts (the forum under the intercreditor agreement) for a determination of the parties rights. Wilmington removed the action to the district court in New York. Delaware Trust asked the district court to abstain and return the case to the state court; Wilmington asked that the case be transferred to the District of Delaware to be referred to the bankruptcy court. Several institutions holding claims subject to the intercreditor agreement moved to intervene and the court granted them leave to do so. The resolution of the remand, transfer and reference motions, were analyzed as depending on whether the dispute was viewed as arising under the Bankruptcy Code or related to or arising in the TCEH bankruptcy case (28 U.S.C. 157(a)). The district court reasoned that dispute over cash collateral could only arise in the chapter 11 case. Such a dispute is recognized as a core matter in chapter 11 especially since the relief sought extended not just to

17 the funds held by the escrow agent but to all future cash collateral payments (that would come from funds which are property of the estate). The court found that the case was not subject to mandatory abstention, was not a suitable case for permissive abstention and that the case should be transferred to Delaware as a jurisdiction in which the case could have been brought for reference to the bankruptcy court. Doing so would further judicial economy and the convenience of the parties to meet the Bankruptcy Code policy of centralized and efficient administration of the bankruptcy case